The value of Bitcoins has doubled since they hit bottom last month. We take a …

The last time we wrote about Bitcoin, in October, the currency's future looked grim. A series of security incidents had created an avalanche of bad press, which in turn undermined public confidence in the currency. Its value fell by more than 90 percent against the dollar.

We thought Bitcoin's value would continue to collapse, but so far that hasn't happened. Instead, after hitting a low of $2, it rose back above $3 in early December, and on Monday it rose above $4 for the first time in two months. It's impossible to predict where the currency will go next, but at a minimum it looks like the currency will still be around in 2012.

This presents a bit of a puzzle for Bitcoin skeptics. The original run-up in prices could easily be explained as a speculative bubble, and the subsequent decline as the popping of that bubble. But if that were the whole story, then the value of Bitcoins should have continued to decline as more and more people lost confidence in the currency. That hasn't been happening.

Of course, the value of Bitcoin could resume falling at any time, but the currency's apparent stability over the last month has inspired us to give it a second look. How can an ephemeral currency without the backing of any large institution be worth $30 million, as the world's Bitcoins currently are? In the short run, a currency's value can be pumped up by a speculative bubble, but in the long run it must be backed up by "fundamentals"—properties that make holding it objectively valuable.

Dollars are valuable because they're the official medium of exchange for the $14 trillion US economy; euros and yen are valuable for similar reasons. Bitcoin boosters have traditionally suggested that Bitcoin is an alternative to these currencies. But we'll suggest an alternative explanation: that Bitcoin is not so much an alternative currency as a "metacurrency" that allows low-cost and regulation-free transfer of wealth between nations. In other words, Bitcoin's major competitors aren't national currencies, but wire-transfer services like Western Union.

Bitcoin is a bad currency

While Bitcoin isn't a very good currency, it has the potential to serve as a "metacurrency": a medium of exchange among the world's currencies.

The traditional argument for Bitcoins has positioned the peer-to-peer currency as an alternative to conventional currencies like dollars, euros, and yen. Bitcoin boosters point to two major advantages Bitcoins have over dollars: price stability and lower transaction costs. As we'll see, neither of these advantages is compelling for ordinary consumers.

The argument from stability mirrors the traditional argument for a gold standard. The dollar has lost about 95 percent of its value over the last century. The Bitcoin protocol is designed to never allow more than 21 million Bitcoins to enter circulation, and supporters argue that this guarantees the currency maintains its value over time.

The obvious problem with this argument is that Bitcoins have lost more than 90 percent of their value in five months. It would be pretty foolish for someone worried about the dollar's 3 percent inflation rate to put their life savings into a currency with that kind of volatility.

Bitcoin boosters forget that the value of a currency is determined by supply and demand. Demand for dollars is driven by the size of the US economy, which doesn't change very much from year to year. But the demand for Bitcoins is primarily driven by speculative forces, causing its value to fluctuate wildly.

Another oft-touted benefit of Bitcoin is lower transaction fees. Banks make a tidy profit charging merchants to complete credit- and debit-card transactions, and these fees raise the price consumers pay for goods and services. Fans tout Bitcoin payments as a low-cost alternative to traditional credit card transactions.

But this argument ignores the fact that credit cards provide important benefits in exchange for those transaction fees. If you buy something with a credit card and get ripped off, you can dispute the charge and get your money back. In contrast, Bitcoin transactions are irreversible. If you pay a merchant in Bitcoins and he rips you off, (or someone hacks into your computer and makes a fraudulent payment), you're out of luck.

Of course, third parties may offer Bitcoin-based payment services that offer features such as chargebacks and fraud protection. But such services don't come free; consumers or merchants would have to pay fees to use them. And there's no reason to think Bitcoin-based banking services would be any cheaper than traditional ones in the long run.

Paying with Bitcoins also introduces the inconvenience of fluctuating prices. When people buy things with cash or credit cards, their purchases are denominated in the local currency. Dealing in Bitcoins means customers and businesses must regularly convert between dollars and Bitcoins, and must therefore worry about the fluctuating exchange rate between them. That's a headache few people want.

So Bitcoins are not a compelling alternative to conventional currencies. Although there are a few isolated examples of traditional businesses accepting Bitcoins as payment, these seem to be driven more by the novelty of the concept than by compelling economic or technical advantages.

Bitcoin as a metacurrency

While Bitcoin isn't a very good currency, it has the potential to serve as a "metacurrency": a medium of exchange among the world's currencies. In this role, it has the potential to be a powerful competitor to wire transfer services like Western Union.

The longer Bitcoins continue to exist, the more confidence people will have in its continued existence.

The wire transfer industry is much less consumer-friendly than the credit card industry. Wire transfer fees can be much higher than credit card fees, and wire-transfer networks offer much less robust fraud protection services than do credit card networks.

Moreover, the flow of funds across national borders is heavily regulated. Governments monitor the flow of funds in an effort to stop a variety of activities they don't like. In the US, the focus is on terrorism, tax evasion, gambling, and drug trafficking. (Carrying cash across borders in a suitcase invites similar government scrutiny.)

Bitcoin allows wealth to be transferred across international borders without the expense or government scrutiny that comes with traditional wire transfers. An American immigrant wanting to send cash to his family in India needs only to find someone in the United States to trade his dollars for Bitcoins. He can then transfer the Bitcoins to his relatives in India, who then need to find someone willing to take Bitcoins in exchange for rupees.

This decentralized money-transfer process will be much harder for governments to control than a centralized money-transfer company like Western Union. And that will make the world's governments upset, since the same technology can be used by an American drug dealer to send profits back to his partners in Latin America.

But there may be little governments can do about this. They can attempt to mandate the reporting of Bitcoin transactions, but there's no obvious way to enforce such a regulation, since Bitcoin transactions are easy to obfuscate. At most, governments could prohibit the conversion of funds between local currencies and Bitcoins, but this will merely push the currency underground, not eliminate it altogether.

If Bitcoin's value stabilizes, it will also become a way to store wealth beyond the reach of any government. Cash and gold are bulky, hard to move, and subject to confiscation. In contrast, the encrypted credentials of a Bitcoin wallet can be stored securely on a server anywhere in the world. This could make the currency appealing to anyone wanting to place his wealth beyond the reach of the law—a corrupt government official wanting to hide ill-gotten gains, a political dissident who fears his life savings will be taken, or an ordinary citizen worried about the solvency of traditional banks.

Bitcoin's role as a way to move and store wealth does not depend on Bitcoins being widely used for commerce. For Bitcoin to work as a viable "metacurrency" only requires that there be a liquid market between Bitcoins and national currencies. Such a market already exists for several major currencies.

Chicken and egg

Of course, there's a circularity to this argument. Bitcoin's value as a way to move and store wealth depends on the value of Bitcoins being relatively stable against conventional currencies. And the continued value of Bitcoins depends on people finding nonspeculative uses for it. But if the currency continues to retain its value in the coming months (a big if, admittedly) this would be a sign that the chicken-and-egg problem has been solved. And the longer Bitcoins continue to exist, the more confidence people will have in its continued existence.

Western Union moved $70 billion across borders in 2010, earning about $1 billion in profits. There's no Bitcoin Inc. to compete directly with Western Union, but the owners of Bitcoins can be thought of as shareholders in a decentralized Western Union alternative. If the Bitcoin network captures a small fraction of Western Union's money-transfer business, the currency's current "market capitalization" of around $30 million could wind up looking downright puny.

Timothy B. Lee
Timothy covers tech policy for Ars, with a particular focus on patent and copyright law, privacy, free speech, and open government. His writing has appeared in Slate, Reason, Wired, and the New York Times. Emailtimothy.lee@arstechnica.com//Twitter@binarybits

How long of a run? Diamonds have been very profitable using artificial scarcity.

In the long run, the universe dies and we are all dust. Earth will fail.

I am well aware of the diamond scam, yet diamonds still require a significant physical resource expenditure to either mine or produce from carbon. The process is still relatively expensive and there are physical means involved. Also keep in mind that diamonds are not money, and were never considered money. They arent even traded like gold and other commodities!!! Profitable - sure, there are lots of products that are profitable, but they arent money or tradeable.With bitcoin everything is virtual. Whoever has access to the software algorithm can make them out of thin air (just like our banks are making dollars out of thin air devaluing their value, also note that every single fiat currency in history went to zero because of this). This is why gold is the only real money. At least until replicators are reality lol.

Gold has a multitude of properties that make it suitable for money. Gold is scarce, non-corrosive, easily divisible, easy portable, and it does not degrade or rot away under any atmospheric conditions. Gold's scarcity and the fact that its supply is unlikely to suffer sudden increases, makes it the prime candidate to act as a medium of exchange. Historically, gold's use as money is unparalleled in the free market.

Ars is somewhat behind the curve on Bitcoin, but the realization that it might be more significant than first glance let on is gradually becoming known. The dismissal and ridicule aimed at Bitcoin has been almost universally rooted in misconceptions about either the structure of the software or the economics that describe what's occurring.

Oh, the Ron Paul argument. "You disagree, therefore you must not understand, here let me explain in small words for the morons."

"Widespread adoption will cause hyperdeflation" is not a misunderstanding. It is an inescapable consequence of design choices in the Bitcoin system. The ridicule comes because Bitcoin implementors and fans seem to think rapid deflation is either benign or desirable.

Maybe this analogy will work for you: bitcoin is not a business just as linux is not a business. They are both open source systems with developers that come and go and are not paid. Businesses are built on top of both systems but nobody owns them.And, yes, it would still continue to function if the developers left tomorrow.

Or maybe this analogy. A properly run pyramid scheme is not a single business, but rather a system of independently owed businesses, thus limiting the liability of the those at the top of the pyramid. Indeed, those at the top of pyramid can cash out once the system is in place, leaving everyone else to deal with the consequences.

Just like the bitcoin early adopters could drive a bubble, sell off their worthless bytes to libertarian schmucks at ridiculous prices, and then leave those schmucks holding the bag of flaming dog feces when the bubble bursts...

So now it's some kind of conspiracy between several bitcoin users and/or businesses? Couldn't the same thing happen to gold and its owners?

itt newbies don't understand how markets work.

When a few early adopters start massive sell-offs, eventually other players take notice and start selling off too. A little bit later other people notice, and they sell off, not wanting to lose any more value than they already have. This causes a panic and the value crashes. There's no conspiracy here, just lemming psychology at work. (And yes, gold can crash too.)

I realize how markets work and, in bitcoin's case, we recently saw a hype-based speculative bubble and subsequent sell-off. But, just as we expect in free markets, the sell-off was a correction. In June, the bitcoin economy lacked (and still lacks, IMO) the infrastructure and demand to warrant a value of $30 per bitcoin. Therefore the exchange rate corrected, bottoming out at $2.Until bitcoin becomes more widely adopted, it will be highly volatile and very prone to panic buys and sells, particularly by big players. But every market is vulnerable to influence in this way. That doesn't mean the big players created bitcoin as some kind of conspiracy and pyramid scheme in order to manipulate people and take their money. Using gold as a money was a good idea, using bitcoin as a money in our digitally connected world is also a good idea. Whether it will be adopted to the point of stability is yet to be seen.

The way feds (read IRS) get into the act is to open up their own exchange and offer a service similar to "titling" for vehicles. To certify any transaction, you could use an "echo service" with the establishment that would involve your transferring the bit coins to them and they escrow it for. Now you have established. ownership and the establishment can publish their biitcoin ID. This would allow you to sign off on any transactions as well as provide backing for replacements (from exchanges) if bitcoins are somehow stolen.

Of course I expect the feds to come down on this as a "terrorist" tool because it exists outside the control of the federal reserve and treasury. The last time this happened (liberty dollar) well that was seized into oblivion.

Also whomever said "buy your money" and it's worth the same is a moron. I would have said ignorant, but with the recent financial crisis there is no excuse for not knowing the fed is printing money and devaluing the dollar.

I don't have enough time to read through all of the comments, but one thing strikes me: For Bitcoin to function as a transfer between currencies, it must at all times have the same relationship between currencies that the currencies have with each other. Here's an example based on the article: Currently $1 U.S. is worth ~52.73 Indian rupees. So if a Bitcoin is worth $4 U.S., then it must also be worth ~211 Indian rupees or less to get a positive transfer rate from India to the U.S. But if Bitcoin is truly an independent currency, shouldn't it fluctuate independently against all other currencies based on supply and demand in each market?

Bitcoin is one of the most brillant under-rated technology we've ever seen in our lifetime. It would be like Thomas Edison inventing the light bulb and everyone is nay saying it .This my friends is going to change everything we do mark my words. It will transform whole countries and peoples lives.

Just look back at my post here in 10 years and you'll be going this guy was right.

I don't have enough time to read through all of the comments, but one thing strikes me: For Bitcoin to function as a transfer between currencies, it must at all times have the same relationship between currencies that the currencies have with each other. Here's an example based on the article: Currently $1 U.S. is worth ~52.73 Indian rupees. So if a Bitcoin is worth $4 U.S., then it must also be worth ~211 Indian rupees or less to get a positive transfer rate from India to the U.S. But if Bitcoin is truly an independent currency, shouldn't it fluctuate independently against all other currencies based on supply and demand in each market?

I'm saddened by the fact that the readers of a tech site such as arstechnica can be so ignorant to many of the aspects related to Bitcoin. This is going to be a long post because I need to address a large number of fallacies. But I will put a topic for each one so one does not necessarily have to read the whole thing.

- Comments on the article

The article was actually pretty good. It had nothing seriously wrong with it. The main thing I want to address is choice. We have little choice today in what kind of protections we really want, for example I would not personally need any type of fraud protection if it worked as an optional insurance, and this is how it would work with Bitcoin. On top of this it's clear that chargebacks are more harmful to merchants than they are to customers. They are used more in scamming merchants, not the other way around. We should not see this in the prices we pay which is something Bitcoin fixes quite nicely.

Even though some banking services would still have demand with a currency such as Bitcoin, a large majority of what the banks do today would not be needed. Banks are in most part, a useless intermediary that leeches on the productive society. Bitcoin solves this in a way that works and I see that in 10 years cryptocurrencies have the potential to challenge everything. But I do agree that on the shorter term, it is much more realistic to compete with services such as Western Union and after that maybe PayPal.

- "Mining incentive will end once new bitcoins are no longer created"

This is a prime example of not looking into the technology well enough. But that's okay, this is not something you start considering right away. It's in-depth stuff. I'll go through how it actually works.

Currently the Bitcoin network has a fee of 0.0005 bitcoins once the size of the next block reaches a certain target. As far as I know this is 27 kilobytes. Then the fees gradually go up as we reach the limit of 500 kilobytes. It's very important to understand that attributes such as these are subject to change. The system scales quite well taking into account lite nodes and client/server solutions.

Anyway, the point is that the miners do not get just the bitcoins that are created when a block is found, they also get the money from the fees. The idea is that in the future the fees will be slightly larger (but still very small) and a market between miners and users emerges where competition and demand will set the fees and the speed of transactions. In any event the miners will get money from the fees and probably a very significant amount if Bitcoin continues to grow.

Right now the fees are irrelevant because they are such a small part of the reward, but this will obviously change. Fees will become the reward and it will be just as competitive as it is now, even more competitive because even the relationship between the miners and the users will be a market of its own.

- "Bitcoins can be created from thin air which makes it stupid, but gold is different"

This is a very recent comment that's utterly ignorant. Saying this means you haven't even studied the basics of Bitcoin. Bitcoin mining doesn't create bitcoins out of nothing, it's a process that requires hardware, significant processing power and electricity. No one can simply choose to create them, it's a network faster than the top 500 super computers combined and they all try to find the right hash that corresponds with the next block. There is no easy way of creating bitcoins, creating them requires significant effort.

- "Bitcoins are only good as a store of value because of the deflationary economic model"

This is actually a complex subject and I will only scratch the surface here. I will respond if someone wants to challenge me. First of all, I agree in part with miscreanity that Bitcoin is more ideal as a store of value. There is a possibility that another cryptocurrency takes the role of a medium of exchange in the future, but personally I'm willing to give Bitcoin a shot for both uses.

The whole deflation argument is mostly absolute BS and this includes the Krugman article. It's basically your textbook Keynesian propaganda, nothing else. To get a complete viewpoint of this issue one MUST take a look at the Austrian school as well. I will now go and try to explain this in a brief fashion.

Bitcoins eventually have a fixed money supply. It's neither deflationary or inflationary, with the exception of lost coins. So there is actually no heavy deflation going on inherently, what creates the situation of increasing value and decreasing prices is increase in usage, growth. But generally this is good for everyone. Everyone wins.

The argument that a small portion of people win and most lose is ridiculous, the actual purchasing power of everyone increases and the people who lose are the people who don't join the Bitcoin train because the other currencies lose value in this process. The only real issue with the growing price of Bitcoin (due to increased usage) is that people have incentive to not spend money. But this is partly a fallacy as well.

It's a theoretical idea which has been shown to have little real life support. Bitcoin is a new revolutionary payment system that people are excited about. They will try it out and play with it, regardless of the what the "rational" thing to do is. In times of Bitcoin growth and massive value increases, the merchants have seen MORE business. This will always be the case with a technology such as Bitcoin, the interest people have in the technology overrides any incentives to save so people actually use it more in times of growth.

Once the growth spike is over and things balance out a bit, people are used to using it and the situation levels off. But at that point no further value increase is expected, perhaps the opposite, a correction. Then the problem no longer applies. If there is, most of the time, no deflation or a small deflation, it won't be enough to stop people from investing. The economy will work.

Bitcoin will grow but it's never certain or predictable, the growth can stop at any point. It doesn't have a predictable long term growth unless you believe it will always grow for long term. This means that you're a heavy Bitcoin supporter and you're investing in it. You will make a lot of money if it works like you think it will, but that's it. This is not a serious issue for the functionality of the economy at large. Investing in bitcoins is always a risk, not a certain outcome of positive return.

There are more points to this such as the fact that for some people the increased purchasing power they now enjoy, thanks to deflation, will lead them to make a purchase they otherwise couldn't. It's an absolute fallacy to think that the economic model of Bitcoin doesn't work. It certainly could fail but it's far from a certainty. In general a "no inflation/deflation" or "slight deflation" -model makes massively more sense to me from any sane perspective than an inflationary model does, I don't want my money to lose value nor do I want an artificial extra incentive to spend my money or consume goods.

In fact if Bitcoin was accepted more widespread I would use it for everything. I trust banks and governments less these days than I trust the cryptography and distributed networks that Bitcoin uses. I have absolutely no desire for an inflationary version of Bitcoin either, if I'm given the choice I will choose a currency that doesn't lose its value from inflation. And I believe that the volatility issues of Bitcoin will be minor when we reach a sufficiently high market cap. And that can be reached by getting more usage as a payment system or as a store of value.

- "Bitcoin is a ponzi scheme, the early adopters are making a killing on your expense!"

This is the most puny and sad argument of all the critiques in the comments. It's a comment I run into very often and I see it as pathetic. This is actually very simple to explain, won't take long.

For the early adopters mining bitcoins was just as profitable as it has been for everyone else and how it will be for everyone in the future, except that the competition is of course a bit tougher now. But it is still comparable. When someone mined thousands of coins back in the day, each worth 1 cent, it wasn't glorious. It wasn't easy money. No one could know for sure they were ever going to be worth anything significant, which is probably the reason that even as many as hundreds of thousands of coins were lost in the beginning.

Now if some of these people actually decided to save the coins as an investment, it would be NO DIFFERENT than someone buying Google stocks when they were still worth nothing. It's exactly the same. A very, very smart investment. From this point of view everyone can be early adopters right now, do not whine when Bitcoin is $100 a piece or $1000 a piece, either invest now and take the risk, or don't. It's your choice.

Most of the early adopters have already either sold most of their coins, all of their coins or lost most or all of them. The coins will continue to be distributed to a wider and wider userbase. The bubbles actually ensure this. The overshot prices make sure there is incentive for bigger holders to sell those coins and circulate them, which is good because it distributes the money. Everyone simply hoarding is not good but I have seen no evidence of this, a good portion of the "never moved" coins have probably been lost or forgotten at this point.

Ars is somewhat behind the curve on Bitcoin, but the realization that it might be more significant than first glance let on is gradually becoming known. The dismissal and ridicule aimed at Bitcoin has been almost universally rooted in misconceptions about either the structure of the software or the economics that describe what's occurring.

Oh, the Ron Paul argument. "You disagree, therefore you must not understand, here let me explain in small words for the morons."

"Widespread adoption will cause hyperdeflation" is not a misunderstanding. It is an inescapable consequence of design choices in the Bitcoin system. The ridicule comes because Bitcoin implementors and fans seem to think rapid deflation is either benign or desirable.

Both deflation and inflation can be nasty if it happens fast enough. In these debt overloaded times, deflation can be nasty as hell. But for bankers, inflation is killer because it undermine their lending profits (as long as wages are properly adjusted to keep up with the inflation that is).

"Widespread adoption will cause hyperdeflation" is not a misunderstanding. It is an inescapable consequence of design choices in the Bitcoin system. The ridicule comes because Bitcoin implementors and fans seem to think rapid deflation is either benign or desirable.

This is a process, not an instantaneous occurrence. Such a deflationary scenario would occur over an extended period of time after critical mass is attained. It is unlikely that the full capacity for unit division will be necessary before that point; additional monetary base expansion should still be possible.

Bitcoin is dynamic, not static: changes can be made to the protocol to allow for further unit division (it's technically unlimited because of the purely abstract, mathematical basis for the unit), which means that Bitcoin can be 'inflated' and effectively function as the sole form of money. For comparison, gold is physically limited to around the gram level as smallest unit for practical purposes.

Issues might arise with the consensus nature of the Bitcoin system that could complicate progressive division. That could be alleviated by an alternate blockchain allowing for unrestricted expansion. The end result would be a system operating in the same manner as the existing gold/fiat duality.

You have proven my statement that the arguments against Bitcoin almost entirely stem from misconceptions, in your case about the structure of the system. Over time, this will become accepted as common knowledge, but for now this dispute will no doubt persist. Since it is a misconception, the solution is simply awareness and understanding; please read the entire Bitcoin FAQ (or delve into the source code for a much deeper level of comprehension).

As an addendum: with 8 decimal places of expansion available, the resulting number of units available is approximately 2.1x10^15 or 2,100,000,000,000,000 - that comes out to ~300,000 units (Satoshis) for every individual at a global population of 7,000,000,000. This is a pool of liquidity at least 50% greater than that of current USD-denominated derivatives, and it completely eclipses the actual monetary base ($8 trillion [8x10^11] US domestic and $12 trillion int'l eurodollars; total ~$20 trillion). The greatest benefit is that this cannot be directly debauched or manipulated by any central authority, although alternatives (generally deriving their value from the base pool of wealth within the Bitcoin economy) might not be so democratic in nature.

I'm saddened by the fact that the readers of a tech site such as arstechnica can be so ignorant to many of the aspects related to Bitcoin. This is going to be a long post because I need to address a large number of fallacies. But I will put a topic for each one so one does not necessarily have to read the whole thing.

- Comments on the article

The article was actually pretty good. It had nothing seriously wrong with it. The main thing I want to address is choice. We have little choice today in what kind of protections we really want, for example I would not personally need any type of fraud protection if it worked as an optional insurance, and this is how it would work with Bitcoin. On top of this it's clear that chargebacks are more harmful to merchants than they are to customers. They are used more in scamming merchants, not the other way around. We should not see this in the prices we pay which is something Bitcoin fixes quite nicely.

Even though some banking services would still have demand with a currency such as Bitcoin, a large majority of what the banks do today would not be needed. Banks are in most part, a useless intermediary that leeches on the productive society. Bitcoin solves this in a way that works and I see that in 10 years cryptocurrencies have the potential to challenge everything. But I do agree that on the shorter term, it is much more realistic to compete with services such as Western Union and after that maybe PayPal.

- "Mining incentive will end once new bitcoins are no longer created"

This is a prime example of not looking into the technology well enough. But that's okay, this is not something you start considering right away. It's in-depth stuff. I'll go through how it actually works.

Currently the Bitcoin network has a fee of 0.0005 bitcoins once the size of the next block reaches a certain target. As far as I know this is 27 kilobytes. Then the fees gradually go up as we reach the limit of 500 kilobytes. It's very important to understand that attributes such as these are subject to change. The system scales quite well taking into account lite nodes and client/server solutions.

Anyway, the point is that the miners do not get just the bitcoins that are created when a block is found, they also get the money from the fees. The idea is that in the future the fees will be slightly larger (but still very small) and a market between miners and users emerges where competition and demand will set the fees and the speed of transactions. In any event the miners will get money from the fees and probably a very significant amount if Bitcoin continues to grow.

Right now the fees are irrelevant because they are such a small part of the reward, but this will obviously change. Fees will become the reward and it will be just as competitive as it is now, even more competitive because even the relationship between the miners and the users will be a market of its own.

- "Bitcoins can be created from thin air which makes it stupid, but gold is different"

This is a very recent comment that's utterly ignorant. Saying this means you haven't even studied the basics of Bitcoin. Bitcoin mining doesn't create bitcoins out of nothing, it's a process that requires hardware, significant processing power and electricity. No one can simply choose to create them, it's a network faster than the top 500 super computers combined and they all try to find the right hash that corresponds with the next block. There is no easy way of creating bitcoins, creating them requires significant effort.

- "Bitcoins are only good as a store of value because of the deflationary economic model"

This is actually a complex subject and I will only scratch the surface here. I will respond if someone wants to challenge me. First of all, I agree in part with miscreanity that Bitcoin is more ideal as a store of value. There is a possibility that another cryptocurrency takes the role of a medium of exchange in the future, but personally I'm willing to give Bitcoin a shot for both uses.

The whole deflation argument is mostly absolute BS and this includes the Krugman article. It's basically your textbook Keynesian propaganda, nothing else. To get a complete viewpoint of this issue one MUST take a look at the Austrian school as well. I will now go and try to explain this in a brief fashion.

Bitcoins eventually have a fixed money supply. It's neither deflationary or inflationary, with the exception of lost coins. So there is actually no heavy deflation going on inherently, what creates the situation of increasing value and decreasing prices is increase in usage, growth. But generally this is good for everyone. Everyone wins.

The argument that a small portion of people win and most lose is ridiculous, the actual purchasing power of everyone increases and the people who lose are the people who don't join the Bitcoin train because the other currencies lose value in this process. The only real issue with the growing price of Bitcoin (due to increased usage) is that people have incentive to not spend money. But this is partly a fallacy as well.

It's a theoretical idea which has been shown to have little real life support. Bitcoin is a new revolutionary payment system that people are excited about. They will try it out and play with it, regardless of the what the "rational" thing to do is. In times of Bitcoin growth and massive value increases, the merchants have seen MORE business. This will always be the case with a technology such as Bitcoin, the interest people have in the technology overrides any incentives to save so people actually use it more in times of growth.

Once the growth spike is over and things balance out a bit, people are used to using it and the situation levels off. But at that point no further value increase is expected, perhaps the opposite, a correction. Then the problem no longer applies. If there is, most of the time, no deflation or a small deflation, it won't be enough to stop people from investing. The economy will work.

Bitcoin will grow but it's never certain or predictable, the growth can stop at any point. It doesn't have a predictable long term growth unless you believe it will always grow for long term. This means that you're a heavy Bitcoin supporter and you're investing in it. You will make a lot of money if it works like you think it will, but that's it. This is not a serious issue for the functionality of the economy at large. Investing in bitcoins is always a risk, not a certain outcome of positive return.

There are more points to this such as the fact that for some people the increased purchasing power they now enjoy, thanks to deflation, will lead them to make a purchase they otherwise couldn't. It's an absolute fallacy to think that the economic model of Bitcoin doesn't work. It certainly could fail but it's far from a certainty. In general a "no inflation/deflation" or "slight deflation" -model makes massively more sense to me from any sane perspective than an inflationary model does, I don't want my money to lose value nor do I want an artificial extra incentive to spend my money or consume goods.

In fact if Bitcoin was accepted more widespread I would use it for everything. I trust banks and governments less these days than I trust the cryptography and distributed networks that Bitcoin uses. I have absolutely no desire for an inflationary version of Bitcoin either, if I'm given the choice I will choose a currency that doesn't lose its value from inflation. And I believe that the volatility issues of Bitcoin will be minor when we reach a sufficiently high market cap. And that can be reached by getting more usage as a payment system or as a store of value.

- "Bitcoin is a ponzi scheme, the early adopters are making a killing on your expense!"

This is the most puny and sad argument of all the critiques in the comments. It's a comment I run into very often and I see it as pathetic. This is actually very simple to explain, won't take long.

For the early adopters mining bitcoins was just as profitable as it has been for everyone else and how it will be for everyone in the future, except that the competition is of course a bit tougher now. But it is still comparable. When someone mined thousands of coins back in the day, each worth 1 cent, it wasn't glorious. It wasn't easy money. No one could know for sure they were ever going to be worth anything significant, which is probably the reason that even as many as hundreds of thousands of coins were lost in the beginning.

Now if some of these people actually decided to save the coins as an investment, it would be NO DIFFERENT than someone buying Google stocks when they were still worth nothing. It's exactly the same. A very, very smart investment. From this point of view everyone can be early adopters right now, do not whine when Bitcoin is $100 a piece or $1000 a piece, either invest now and take the risk, or don't. It's your choice.

Most of the early adopters have already either sold most of their coins, all of their coins or lost most or all of them. The coins will continue to be distributed to a wider and wider userbase. The bubbles actually ensure this. The overshot prices make sure there is incentive for bigger holders to sell those coins and circulate them, which is good because it distributes the money. Everyone simply hoarding is not good but I have seen no evidence of this, a good portion of the "never moved" coins have probably been lost or forgotten at this point.

This is all I have for now, feel free to challenge me.

No need to challenge you, the internet senses damage and routes around it. Have fun being irrelevant, and say hello to the 19th century for us.

I don't have enough time to read through all of the comments, but one thing strikes me: For Bitcoin to function as a transfer between currencies, it must at all times have the same relationship between currencies that the currencies have with each other. Here's an example based on the article: Currently $1 U.S. is worth ~52.73 Indian rupees. So if a Bitcoin is worth $4 U.S., then it must also be worth ~211 Indian rupees or less to get a positive transfer rate from India to the U.S. But if Bitcoin is truly an independent currency, shouldn't it fluctuate independently against all other currencies based on supply and demand in each market?

Visa and Mastercard have a corporate monopoly. Until the Euro or Dollar has an anonymous digital version of their cash currency there will remain a huge void.

The US government shutting down donation payments to Wikileaks is showing people that they are just slaves to the wealthy and need to fall in line or be shut down. Why pay a digital currency tax on your own hard earned money.

Is Bitcoin the answer? Who knows - but it looks like the beginning of the next big revolution on the internet.

40% of the United States GDP was Financial services. That's just moving money around, charging fees and creating debt. rich got richer the working people got screwed the feds printed money. The banks need to be cut out. good luck.

No one. Well, no one official. If you somehow manage to find a flaw in Bitcoin that lets you counterfeit them (no easy task), I would imagine there are a great many vested interests would try to unofficially either shut you down, or take your ability for themselves.

Take the example of a drug cartel transferring money. If you devalue their means of transferring money, they might try to take it out on you personally, or leverage your system themselves. Neither result is very good for you, if you can be found.

I thought bitcoins mostly existed as their transactional history, and mining them was the proof of work to encrypt and verify that history. My grasp on the math is a little shaky. I'm not sure there's a functional difference between counterfeiting bitcoins and mining them.

The problem with deflation is not unit division any more than the problem with inflation is that the central bank runs out of space to print zeros on their bills.

This is obvious. Care to explain why exactly is deflation an issue with Bitcoin?

And no, general answers do not apply. Deflation happens for a number of reasons and I argue that the way it happens with Bitcoin is actually quite healthy. I went through this already but there is more.

For instance, by being a supporter, developer and enterpreneur in the Bitcoin-community, I get the added incentive of seeing my bitcoin-savings rise in value if I do good work to increase adoption.

The Bitcoin model, in all respects, has so far been massively motivating and it works. The growth has been incredible. The only issue I see with deflation is that it could slow investments but I see the opposite happening.

Bitcoin takes away all the leeching intermediaries leading to people taking responsibility of their own money. This, combined with the fact that money transfers are so cheap, opens up the possibilities for new types of loaning and investment methods.

The issue with hyperinflation is valid but these are spikes in the Bitcoin model, never the norm. One very important angle to this is that speculators take into account the expected deflation. This means that when we expect Bitcoin to grow, the value adjusts fast to make it seem even more of a spike. With a bigger market cap this will be more evident because the market will have more speculators.

In conclusion, it's clear to me that a small deflation doesn't kill the economy because good investments still give you a much higher return. And hyperinflation is only possible in spikes that are predictable right before they happen, but definitely not predictable in the long run.

No one can currently say, nor can they in any foreseeable future, that the yearly deflation rate of Bitcoin is this and this. Saving/investing based on a certain deflation rate or any deflation is not possible, it's dependent on faith that Bitcoin will continue to grow so essentially it's speculation, a gamble.

From an investment point of view I'm already happy if my savings do not lose value. With regular money, it's a heavily losing proposition to keep funds in a regular bank account because the interest doesn't even cover inflation.

Simply looking at it from my own point of view I clearly see that I'm not cutting my spending or investing because Bitcoin might deflate. In fact it's the opposite, I think the current financial structure is doomed which has lead to me being forced to simply hoard gold, bitcoins and cash. Everything else is very risky. I'm investing in my Bitcoin startup now though, which adds value to the Bitcoin economy.

All Bitcoin needs is more acceptance as payment and it could change everything. I see no reason to use regular money once this starts to happen. It could take a decade to get there but challenging services such as the Western Union is a good start.

Producers, merchants and consumers will slowly come aboard when they start to understand the issues with our current banking system and start to appreciate the benefits Bitcoin brings to the table.

Deflation creates bubbles (the first one we've already seen), bubbles burst. It's as simple as that.

Deflation creates an incentive to hoard currency instead of spending it. A currency is usually not meant as an investment vehicle, though. Right now, bitcoins are most of the time not traded for goods but for cash. It's like collecting stamps.A deflationary currency will never be stable. And yes, gold is a prime example for that. At least gold proved over time that it will always be worth something.

Sabbe wrote:

One very important angle to this is that speculators take into account the expected deflation.

Yes, speculators will create bubbles. Expectations can change quickly, leading to high fluctuations of the bitcoin value.

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And hyperinflation is only possible in spikes that are predictable right before they happen

Spikes are predictable? Care to explain me how? I could really use some money.

Deflation creates an incentive to hoard currency instead of spending it. A currency is usually not meant as an investment vehicle, though.

I thought I clearly stated that I don't want general answers. The "deflation creates incentive to hoard" is a general answer which is I have already addressed. The effect of this in the real Bitcoin economy is small at best. And I can't see how it would become big, and this is where I'd want more detailed analysis to even consider it.

The "currencies are not meant as investments" is an idiotic argument at best, people should be encouraged to save money to stay financially secure, instead of just continuing to take loans that are unsustainable. The whole mindset of the nonsense economy we have is "spend more, consume more". A new monetary system MUST support other type of behaviour as best as possible. The best way to do this is that your savings do not lose value, period. It's also possible to use those savings directly when needed because the same currency is convenient as a medium of exchange as well (Bitcoin is good as both a store of value and a medium of exchange).

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Right now, bitcoins are most of the time not traded for goods but for cash. It's like collecting stamps.A deflationary currency will never be stable. And yes, gold is a prime example for that. At least gold proved over time that it will always be worth something.

I don't disagree that most of Bitcoin trade is speculation. It surely is. But it also has demand for goods and services, it's an economy of its own. It's growing very fast with approximately 10 times more users than it had just one year ago. Also, it's not that bad if there is investing going on. Bitcoin works as an investment too, just like gold. It's just much more convenient in every way. Bitcoin has properties that make sure it has a great future ahead in more ways than one.

Now your argument regarding gold is ridiculous, gold is infinitely more stable than fiat currencies are. The US dollar, for example, has lost a massive amount of value over the decades. Gold hasn't. Gold is speculative I give you that, because it has very little actual usage, but gold has retained its value MUCH better than any fiat currency. Volatility is a different story and I think that Bitcoin could easily become a market bigger than gold eventually and thus more stable. Bitcoin is superior to gold even as a store of value (cheaper to store securely, can be divided to smaller pieces and also easier to move). As a medium of exchange Bitcoin is radically superior to gold.

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Yes, speculators will create bubbles. Expectations can change quickly, leading to high fluctuations of the bitcoin value.

As far as Bitcoin is concerned, it's the speculators that make bubbles smaller than they would otherwise be. And the corrections are milder as well. More speculators = better for stability.

An important lesson is that all monetary systems have some type of bubbles, but with Bitcoin those bubbles can be very small once we reach a high enough market cap. The deflation could temporarily cause hoarding and lack of investment, which would actually affect the economy in a negative way leading to degrowth which would then cause inflation. This would balance it out by creating an incentive to invest again. Hoarding would only be good to a certain limit, after that limit the economy would slow down and start contracting which would cause inflation and a realization that we need to hoard less.

I'll repeat this once more: the Bitcoin economic model works. If you want to prove me otherwise, I need more in-depth analysis.

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Care to explain me how? I could really use some money.

I'll explain. If you're looking at the media coverage of Bitcoin and the market sentiment in general, you have ways of predicting that Bitcoin usage grows. And as we all know, growth will increase the value of bitcoins and thus it makes sense to invest before the value goes up so you can make some money in the process.

My point was that the phases of hyper adoption can't be predicted well in advance. Bitcoin either goes big or it doesn't, no one knows for sure if it will or when it will. But if you look carefully, you can see the signs before it happens. But not much before.

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So you're investing in bitcoins? Sorry, but that's just stupid. Greek government bonds are lower risk than that.

I disagree. Although I admit that Bitcoin is a high risk investment, it's not that bad. It's high risk, but extremely high return as well, if it pays off. I wouldn't recommend anyone to go all-in on bitcoins and I certainly haven't done so but a small percentage of an investors portfolio should go to Bitcoin for sure.

If (and it is a monumental IF) bitcoin ever gains traction a store of value vehicle, this will be its downfall.

Governments of modern industrial nations will not allow easy anonymous transfers of large amounts of money. A one sentence statement from the DOJ with the words 'bitcoin' and 'investigating' in it would destroy any future bitcoin market.

But that doesn't mean bitcoin investing can't be fun; if you like betting on horses and pennystocks, go nutz.

In 2011, the Keynes-Hayek dipole is relevant only in the lay world. Economics has moved on. There is a good argument to be made that the most influential economist post 1900 is is Milton Friedman, whose work you should familiarize yourself with.

But as I said before, the big problem with Bitcoin is there is no govt to back it up and protect it so it is at the mercy of international and national laws. The idea that it exists outside of enforceable codes of human conduct (laws and government) is preposterous.

The problem with deflation is not unit division any more than the problem with inflation is that the central bank runs out of space to print zeros on their bills.

There is no 'problem' with deflation, or with inflation for that matter. They are merely opposing forces. The problem arises with price stability, and that happens in extremes of either force. Gradual changes have marginal impact on price.

You are exhibiting another misconception about the way Bitcoin works; again, please read the Bitcoin FAQ or explore the source code for better understanding. Unit division is inflationary, allowing for an effective expansion of the monetary base which provides liquidity. At present, the protocol allows for expansion of 10^8 units.

The Bitcoin network operates on a consensus basis wherein the majority determines the rules. In order to increase expansion to 10^16 or any other amount, a majority of the nodes participating in the Bitcoin network must agree to that protocol specification or it won't change. This is where complications might arise - if a transition cannot be completed quickly enough, real disruptions can rapidly build. However, that issue is very unlikely to occur for the remainder of this century.

Based only on a 10% annual global economic growth rate starting in 2016, a decimal expansion (unit division) would be necessary every 24 years. Population growth is generally a factor of economic growth, so the variance from that would be minor. To be conservative, prices could be maintained indefinitely on a 20-year cycle at an average of 10% real growth. So there would only be 3-4 decimal expansions necessary through the year 2100. Critical mass adoption by the global population could conceivably push the unit division limits by 2070-2080, necessitating the 10^16 limit in a similar fashion to the IPv4 vs. IPv6 address space issue. At critical mass adoption, another 8 orders of magnitude in expansion could afford over 150 years of additional growth. Contrast that with gold production, which is unlikely to continue without extra-planetary resourcing.

The fact that these numbers can be projected so far out in time (as opposed to existing monetary systems that are lucky to afford a decade of projection even at the most macro of scales) is because the system is governed by mathematically predictable forces instead of bankers, bureaucrats and politicians (although they can also be predictable to an extent). This is such a phenomenally overwhelming benefit that adoption of Bitcoin or similar crypto-currency systems is an inevitability for continued human advancement - economic activity underpins all other activity and must be robust enough to support further growth. The existing system provided an effective basis over the past centuries but is not sufficient for our future.

Deflation creates an incentive to hoard currency instead of spending it. A currency is usually not meant as an investment vehicle, though.

I thought I clearly stated that I don't want general answers. The "deflation creates incentive to hoard" is a general answer which is I have already addressed. The effect of this in the real Bitcoin economy is small at best. And I can't see how it would become big, and this is where I'd want more detailed analysis to even consider it.

Of course you don't want general answers because it blows up the perfect libertardian ideas of the sound money. Here is the reason why sound money is stupid.

1- This is the general answer again it creates incentive to horad money. This is bad for the economy because if you know you can buy more tommorow than you can buy today with the same money you will hold onto the money. This creates more downward pressure on prices and wages creating a downward spiral creating a liquidy trap. Deflation or near deflation has been responsible for oh I don't know every one of the worst economic periods in the United States History. The aftermath of the end of the Second US Bank, Going back to the Gold Standard after the Civil War, and the Great Depression. Never mind the instablity cycle that ran about 8 to 10 years while on the gold standard where there where shorter recessions brought on by short term deflation.

2- Related to the above but wealth being cornered. With Bit Torrent the top of the sceme I mean early adaptors can corner the supply side in effect retarding the market. There is no mechanism in place to expand the money supply creating opertunities where the economy is working perfectly but there is simply no cash to actually operate the day to day business. You have demand and supply both in ready but there is nothing to actually compelete the transaction.

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The "currencies are not meant as investments" is an idiotic argument at best, people should be encouraged to save money to stay financially secure, instead of just continuing to take loans that are unsustainable. The whole mindset of the nonsense economy we have is "spend more, consume more". A new monetary system MUST support other type of behaviour as best as possible. The best way to do this is that your savings do not lose value, period. It's also possible to use those savings directly when needed because the same currency is convenient as a medium of exchange as well (Bitcoin is good as both a store of value and a medium of exchange).

Huh? Currencies are not meant as an investment. Currency is meant to be a means of exchange. How soon we forget September 2008. Without easily available cash the day to day economy comes to a crashing hault. Investments are meant to be something today cost you less than it will cost you tommorow. Currency is meant to keep up with the growth of the economy and small bit of inflation is a feature and not a bug in the system.

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Right now, bitcoins are most of the time not traded for goods but for cash. It's like collecting stamps.A deflationary currency will never be stable. And yes, gold is a prime example for that. At least gold proved over time that it will always be worth something.

I don't disagree that most of Bitcoin trade is speculation. It surely is. But it also has demand for goods and services, it's an economy of its own. It's growing very fast with approximately 10 times more users than it had just one year ago. Also, it's not that bad if there is investing going on. Bitcoin works as an investment too, just like gold. It's just much more convenient in every way. Bitcoin has properties that make sure it has a great future ahead in more ways than one.

The market cap for bitcoins is what 20 million dollars? That is not an economy on its own its a blip on the radar in a 62 trillion dollar economy. The goods and services that use bitcoin are lets be real black market. Amazon, Best Buy, the gas station down the block do not accept it nor will they ever accept it.

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Now your argument regarding gold is ridiculous, gold is infinitely more stable than fiat currencies are. The US dollar, for example, has lost a massive amount of value over the decades. Gold hasn't. Gold is speculative I give you that, because it has very little actual usage, but gold has retained its value MUCH better than any fiat currency. Volatility is a different story and I think that Bitcoin could easily become a market bigger than gold eventually and thus more stable. Bitcoin is superior to gold even as a store of value (cheaper to store securely, can be divided to smaller pieces and also easier to move). As a medium of exchange Bitcoin is radically superior to gold.

Who cares? Wow milk cost a nickle in 1924 when the daily wage was 50 cents. What matters is purchasing power. In this respect the world economy has never had as high of purchasing power as they have in recent times and this includes western countries. Sure there is some income inequility issues were the middle and poor classes have had the same purchasing power for the last 30 years but that is a seperate issue and that the gold standard only makes worse for reasons already discussed.

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Yes, speculators will create bubbles. Expectations can change quickly, leading to high fluctuations of the bitcoin value.

As far as Bitcoin is concerned, it's the speculators that make bubbles smaller than they would otherwise be. And the corrections are milder as well. More speculators = better for stability.

An important lesson is that all monetary systems have some type of bubbles, but with Bitcoin those bubbles can be very small once we reach a high enough market cap. The deflation could temporarily cause hoarding and lack of investment, which would actually affect the economy in a negative way leading to degrowth which would then cause inflation. This would balance it out by creating an incentive to invest again. Hoarding would only be good to a certain limit, after that limit the economy would slow down and start contracting which would cause inflation and a realization that we need to hoard less.

I'll repeat this once more: the Bitcoin economic model works. If you want to prove me otherwise, I need more in-depth analysis.

How about every economic model there is? How about history? You know what history has actually shown? That to stop the downward spiral you either need to increase the balance of trade in your nations favor, increase the money supply, and/or increase the demand. That is how the inflation needed to grow the economy is created. Shrinking the GDP does not cause inflation.

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Care to explain me how? I could really use some money.

I'll explain. If you're looking at the media coverage of Bitcoin and the market sentiment in general, you have ways of predicting that Bitcoin usage grows. And as we all know, growth will increase the value of bitcoins and thus it makes sense to invest before the value goes up so you can make some money in the process.

My point was that the phases of hyper adoption can't be predicted well in advance. Bitcoin either goes big or it doesn't, no one knows for sure if it will or when it will. But if you look carefully, you can see the signs before it happens. But not much before.

I will make an educated guess. bitcoins will have limited use in mostly low level illegal activity and some gold bugs. No one that actually makes a living in trading and investment will touch these things. No legit business of any size will every accept these things. The general public will never care enough to know what these are and the few that do will think they are used to buy child porn.

In 2011, the Keynes-Hayek dipole is relevant only in the lay world. Economics has moved on. There is a good argument to be made that the most influential economist post 1900 is is Milton Friedman, whose work you should familiarize yourself with.

Only if you want to replace anything close to a science with a religion. The cult of Friedman (also known as monetarism) are what has brought us to the sorry state that the US and European economies are in at present.

The problem with deflation is not unit division any more than the problem with inflation is that the central bank runs out of space to print zeros on their bills.

There is no 'problem' with deflation, or with inflation for that matter. They are merely opposing forces. The problem arises with price stability, and that happens in extremes of either force. Gradual changes have marginal impact on price.

You are exhibiting another misconception about the way Bitcoin works; again, please read the Bitcoin FAQ or explore the source code for better understanding. Unit division is inflationary, allowing for an effective expansion of the monetary base which provides liquidity. At present, the protocol allows for expansion of 10^8 units.

Unit division is not inflationary its a stock split. If the market cap of Bit torrents is say 20 million dollars and it is currently 1 million units and split to 10 million units still means a market cap of 20 million dollars. You did not create more money. You just exchanged dimes for 10 pennies.

If (and it is a monumental IF) bitcoin ever gains traction a store of value vehicle, this will be its downfall.

Governments of modern industrial nations will not allow easy anonymous transfers of large amounts of money. A one sentence statement from the DOJ with the words 'bitcoin' and 'investigating' in it would destroy any future bitcoin market.

This is a misconception that assumes governments have control over where wealth flows and how it is used. Incentive is being removed from fiat currencies, especially the US dollar, and rising elsewhere - including Bitcoin.

Governments can stymie use of physical items such as gold and silver, real estate, etc. They can force banking institutions to seize funds and restrict flows. Within the Bitcoin system, those efforts have no effect. Once wealth exits the Bitcoin system (exchanged for EUR, USD, used to purchase real goods), then those arbitrary rules apply.

For example: one person directly paying another 1BTC to shine his shoes cannot be subject to government regulation or taxation by any traditional means. If the person exchanged 1BTC for USD and used those dollars to pay for the shoe shine service, then he is subject.

As the size of the Bitcoin economy grows, the protection afforded by it will increase as well. With no way to directly track capital flows on services, governments will attempt to crack down on real goods movements or disparage communications networks. Either of those has historically led to economic activity slowdowns, further strangling an already distressed system. In effect, governments engaging in these actions will be killing themselves while offering even greater incentive to use Bitcoin.

Saparmurad Niyazov wrote:

But as I said before, the big problem with Bitcoin is there is no govt to back it up and protect it so it is at the mercy of international and national laws. The idea that it exists outside of enforceable codes of human conduct (laws and government) is preposterous.

The governing authority for Bitcoin is a form of direct democracy. As explained in a prior post, the system determines the rules by majority consensus. The 'laws' outlining the system's behavior are in the protocol. Traditional government 'backing' is extraneous and irrelevant. The Bitcoin system governs itself through node participation, and it could be considered a coherent embodiment of the free market.

Incentive to use is the only factor that matters for adoption, and the more governments go to make fiat currencies undesirable, the greater the usage of Bitcoin. This can already be seen with gold, silver, real estate and numerous other asset classes - wealth is fleeing contemporary currencies.

In 2011, the Keynes-Hayek dipole is relevant only in the lay world. Economics has moved on. There is a good argument to be made that the most influential economist post 1900 is is Milton Friedman, whose work you should familiarize yourself with.

Only if you want to replace anything close to a science with a religion. The cult of Friedman (also known as monetarism) are what has brought us to the sorry state that the US and European economies are in at present.

Unit division is not inflationary its a stock split. If the market cap of Bit torrents is say 20 million dollars and it is currently 1 million units and split to 10 million units still means a market cap of 20 million dollars. You did not create more money. You just exchanged dimes for 10 pennies.

You're correct - I should've made the distinction between monetary inflation and price inflation.

Each step of unit division is price inflationary only. Even changing the protocol for a shift from 10^8 unit division to 10^16 would not be monetary inflation; there would still be 21mm of the original Bitcoins, just available in smaller pieces.

In 2011, the Keynes-Hayek dipole is relevant only in the lay world. Economics has moved on. There is a good argument to be made that the most influential economist post 1900 is is Milton Friedman, whose work you should familiarize yourself with.

Only if you want to replace anything close to a science with a religion. The cult of Friedman (also known as monetarism) are what has brought us to the sorry state that the US and European economies are in at present.

Please do not tell me your an Austrian?

Neither, as both are out there in relation to the workings of a real economy.

Unit division is not inflationary its a stock split. If the market cap of Bit torrents is say 20 million dollars and it is currently 1 million units and split to 10 million units still means a market cap of 20 million dollars. You did not create more money. You just exchanged dimes for 10 pennies.

You're correct - I should've made the distinction between monetary inflation and price inflation.

Each step of unit division is price inflationary only. Even changing the protocol for a shift from 10^8 unit division to 10^16 would not be monetary inflation; there would still be 21mm of the original Bitcoins, just available in smaller pieces.

And how would it in any way be price inflationary?! Prices increase because there is more money doing the rounds. dividing the money in smaller and smaller units do not change that what so ever.

If (and it is a monumental IF) bitcoin ever gains traction a store of value vehicle, this will be its downfall.

Governments of modern industrial nations will not allow easy anonymous transfers of large amounts of money. A one sentence statement from the DOJ with the words 'bitcoin' and 'investigating' in it would destroy any future bitcoin market.

This is a misconception that assumes governments have control over where wealth flows and how it is used. Incentive is being removed from fiat currencies, especially the US dollar, and rising elsewhere - including Bitcoin.

LOL. The US dollar is in such demand that we actually make money lending it out.

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Governments can stymie use of physical items such as gold and silver, real estate, etc. They can force banking institutions to seize funds and restrict flows. Within the Bitcoin system, those efforts have no effect. Once wealth exits the Bitcoin system (exchanged for EUR, USD, used to purchase real goods), then those arbitrary rules apply.

For example: one person directly paying another 1BTC to shine his shoes cannot be subject to government regulation or taxation by any traditional means. If the person exchanged 1BTC for USD and used those dollars to pay for the shoe shine service, then he is subject.

As the size of the Bitcoin economy grows, the protection afforded by it will increase as well. With no way to directly track capital flows on services, governments will attempt to crack down on real goods movements or disparage communications networks. Either of those has historically led to economic activity slowdowns, further strangling an already distressed system. In effect, governments engaging in these actions will be killing themselves while offering even greater incentive to use Bitcoin.

LOL. Lets forgot for a moment that except for some libertain gold bug camps in the mountains of Montana or in Upstate Michigan no one that is not a fringe nut is ever going to accept bitcoins. The government is still going to demand its taxes and its not hard to find tax cheats.

And protection for bit coins and keeping anonmous lol. Good luck with that. Lets see I have a choice to keep my money in a bank where its FDIC insured or protected by some internet libertarian? Hard choice there.

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Saparmurad Niyazov wrote:

But as I said before, the big problem with Bitcoin is there is no govt to back it up and protect it so it is at the mercy of international and national laws. The idea that it exists outside of enforceable codes of human conduct (laws and government) is preposterous.

The governing authority for Bitcoin is a form of direct democracy. As explained in a prior post, the system determines the rules by majority consensus. The 'laws' outlining the system's behavior are in the protocol. Traditional government 'backing' is extraneous and irrelevant. The Bitcoin system governs itself through node participation, and it could be considered a coherent embodiment of the free market.

Incentive to use is the only factor that matters for adoption, and the more governments go to make fiat currencies undesirable, the greater the usage of Bitcoin. This can already be seen with gold, silver, real estate and numerous other asset classes - wealth is fleeing contemporary currencies.

This worked out smashingly in the past. Direct democracy is a joke when trying to make techinical decisions.

And lol at the last one. Lets look at what is currently happening. US dollars are in huge demand. British Pounds are in huge demand. Kronoa is in huge demand. Hell even the pegged Swiss Franc and Danish Krone are in huge demand. Basically the flight of money is towards countries that can start up a printing press. The more fiat the currency is the more its attracting investors. Real estate? LOL again. I am not sure you know this or not but the US and Western countries in general (including China) have seen real estate prices drop to below pre boom prices. Gold and Silver are small market cap markets where a small number of investors can create a run up in prices.

Expanding the units available by dividing them (similar to a stock split) provides an extra order of magnitude for every decimal added.

2040 1000 0.902041 1000 0.812042 1000 0.73...

If it had been a 2:1 split instead of the 10:1 that occurs with decimal expansion, this would occur:

2040 200 0.182041 200 0.162042 200 0.14...

That would make the coding more complex, though. In the example above, it can be plainly seen that ~20 year cycles occur, at which point an order of magnitude in economic expansion has caused prices to fall by 90% whereupon a decimal expansion provides another cycle of relative price stability.

LOL. The US dollar is in such demand that we actually make money lending it out.

The question is: why are fiat currencies in demand? To protect wealth, or to scramble so the amount of fiat obtained will keep up with the amount needed to stay solvent? Fiat paper cannot be eaten anymore than gold can.

If the price of grain falls to a level where $1,000 can purchase all the world's production for one year, that doesn't change the fact that people still need to eat. In the opposite direction, if an organization accrues enough currency to buy all of the world's grain, how will the rest of the world pay for it in an environment of reduced liquidity? What happens to that fiat if the monetary base is expanded to allow people to buy food and eat?

Real assets store wealth for long periods of time. Currencies do so over much shorter periods of time, enough to facilitate trade. Central authority can arbitrarily destroy the stability of a currency's value. In order to the same in a Bitcoin system, a government would effectively have to convince more than half of the entire country to accept a 10% drop in the value of the money they hold.

jimisawesome wrote:

LOL. Lets forgot for a moment that except for some libertain gold bug camps in the mountains of Montana or in Upstate Michigan no one that is not a fringe nut is ever going to accept bitcoins. The government is still going to demand its taxes and its not hard to find tax cheats.

And protection for bit coins and keeping anonmous lol. Good luck with that. Lets see I have a choice to keep my money in a bank where its FDIC insured or protected by some internet libertarian? Hard choice there.

Electronic transactions made over existing credit and processing systems are traceable via central control and authority. Each transaction has identifying data sent with it. Bitcoin transactions are cryptographic keys without any associated identifying information. There is no way to determine whether you're logging into your email over SSL or are engaging in a Bitcoin transaction.

Is a government going to watch each and every citizen 24/7/365 to track transactions that aren't made through the 'approved' system? Police would be grabbing mobile phones left and right. It would be cost-prohibitive and Orwellian; not that it won't be attempted.

If you understand inflation, you realize that the money you have on deposit at a financial institution, protected by FDIC 'insurance' can be diluted to worthlessness even though it is 'protected'. Bitcoins cannot be inflated away any more than gold can be.

jimisawesome wrote:

This worked out smashingly in the past. Direct democracy is a joke when trying to make techinical decisions.

The consensus is not achieved by human decisions. Each node must communicate in a method that is accepted by the majority of the network. This is like an English speaking person going to China - he must speak Chinese to function there. In order to change that, you'd have to convince the majority of Chinese to speak English. It's more complex than that, but the general concept is valid.

Jim, you are not very awesome right now. You are making a typical MMT mistake of missing the connection between the abstract monetary realm and physical reality. Numbers can be fiddled with to the end of eternity, but that won't plant crops or build houses. Money provides a way to make the crops easier to plant - it does not dictate reality, rather it offers a simpler means of interaction.

1- This is the general answer again it creates incentive to horad money. This is bad for the economy because if you know you can buy more tommorow than you can buy today with the same money you will hold onto the money. This creates more downward pressure on prices and wages creating a downward spiral creating a liquidy trap. Deflation or near deflation has been responsible for oh I don't know every one of the worst economic periods in the United States History. The aftermath of the end of the Second US Bank, Going back to the Gold Standard after the Civil War, and the Great Depression. Never mind the instablity cycle that ran about 8 to 10 years while on the gold standard where there where shorter recessions brought on by short term deflation.

2- Related to the above but wealth being cornered. With Bit Torrent the top of the sceme I mean early adaptors can corner the supply side in effect retarding the market. There is no mechanism in place to expand the money supply creating opertunities where the economy is working perfectly but there is simply no cash to actually operate the day to day business. You have demand and supply both in ready but there is nothing to actually compelete the transaction.

The flow of capital is not one-way. Hoarding can only be done so far until the incentive for hoarding is outweighed by the incentive to acquire other resources. It is only bad for certain parts of an economy - notably the unnecessary parts. It can just as easily be stated that 'every one of the worst economic periods' has been brought on my over-investment in wasteful efforts.

If half of a country decided to produce pogs and the economy exploded to new highs because of the popularity, the world might seem bright and shiny. When demand for pogs dies down, everyone will be screaming about deflation even though it was an obviously asinine move to base an entire economy on a fad.

Decrying the era of gold-standard usage for it's deflationary cycles is like being upset that you can't eat Turkish delights all day, every day for your entire life without getting sick.

The second item is a search for the Goldilocks economy without acknowledging flaws in the existing one, or any system for that matter. Early adoption is not a bad thing. There have been numerous technologies (including internet transactions) that were adopted early by the porn industry, yet we don't cry about them. Instead, the growing pains were handled by those first involved with it.

What you don't see during the growth phase is the amount of work and effort that goes into the development. Unless you're actively part of it, you can't know. It is obvious that anyone with concerns about liquidity has done little, if anything, to explore the Bitcoin economy.

Do some research before making baseless claims derived from the laughable aspects of MMT.

jimisawesome wrote:

Huh? Currencies are not meant as an investment. Currency is meant to be a means of exchange. How soon we forget September 2008. Without easily available cash the day to day economy comes to a crashing hault. Investments are meant to be something today cost you less than it will cost you tommorow. Currency is meant to keep up with the growth of the economy and small bit of inflation is a feature and not a bug in the system.

Currencies can be an investment. What would you call forex trading? Isn't that investing in the shares of one country versus another? It isn't all that different from bonds.

I do agree about the liquidity issue, so long as liquidity is the right answer for the problem. In 2008, the problem was debt, not liquidity. Adding liquidity disguised the debt, but did not solve the problem - it only made the danger grow.

jimisawesome wrote:

The market cap for bitcoins is what 20 million dollars? That is not an economy on its own its a blip on the radar in a 62 trillion dollar economy. The goods and services that use bitcoin are lets be real black market. Amazon, Best Buy, the gas station down the block do not accept it nor will they ever accept it.

There are 158,789 blocks at a size of 50 blocks each for a total of 7,939,450 bitcoins. The current BTC/USD exchange rate is about $3.90 per BTC. The market size of the Bitcoin economy is USD$30.9mm within a small margin.

Transparency is part of Bitcoin. This is not so with any existing financial systems. Again, this is a consensus-based requirement that cannot be overridden or obfuscated by a central authority. Every single unit is accountable, as is every relevant transaction.

Keep in mind that nothing is certain; everything is speculation. The distinction lies in the certainty of an action. Walking across a bridge made of iron is generally more assuring than one made of thin, rotted wooden planks. Bitcoin could be considered one made of titanium that's still under construction and not quite ready for anything more than foot traffic.

Gold still holds one critical benefit over Bitcoin: it is physical - real. If a solar flare causes major infrastructure damage, gold will still exist and be readily available while Bitcoin might not.

jimisawesome wrote:

Who cares? Wow milk cost a nickle in 1924 when the daily wage was 50 cents. What matters is purchasing power. In this respect the world economy has never had as high of purchasing power as they have in recent times and this includes western countries. Sure there is some income inequility issues were the middle and poor classes have had the same purchasing power for the last 30 years but that is a seperate issue and that the gold standard only makes worse for reasons already discussed.

Businesses care.

Price stability (or at least certainty), is very important for a business to make future projections about everything from hiring new employees to purchasing additional stock. The less the stability, the less likely a business is to expand in any way. How is that good for an economy?

Consumers may only care about purchasing power, but they don't make the goods that are bought with that purchasing power. Without healthy businesses providing goods and services, purchasing power is worthless.

jimisawesome wrote:

Sabbe wrote:

An important lesson is that all monetary systems have some type of bubbles, but with Bitcoin those bubbles can be very small once we reach a high enough market cap. The deflation could temporarily cause hoarding and lack of investment, which would actually affect the economy in a negative way leading to degrowth which would then cause inflation. This would balance it out by creating an incentive to invest again. Hoarding would only be good to a certain limit, after that limit the economy would slow down and start contracting which would cause inflation and a realization that we need to hoard less.

How about every economic model there is? How about history? You know what history has actually shown? That to stop the downward spiral you either need to increase the balance of trade in your nations favor, increase the money supply, and/or increase the demand. That is how the inflation needed to grow the economy is created. Shrinking the GDP does not cause inflation.

More MMT. The only point that holds true in anything other than a number-shuffler's abstract fantasy is that productivity needs to be increased to raise the balance of trade. Anything else is simply an accounting gimmick.

Sabbe's description does a very nice job of discounting the other arguments about hoarding being the 'great evil'.

jimisawesome wrote:

I will make an educated guess. bitcoins will have limited use in mostly low level illegal activity and some gold bugs. No one that actually makes a living in trading and investment will touch these things. No legit business of any size will every accept these things. The general public will never care enough to know what these are and the few that do will think they are used to buy child porn.

Have you ever bought an item from Amazon? Made a payment using PayPal? Bought a subscription on ArsTechnica? Online transactions got their start in the porn industry. Now where are online transactions? Everywhere.

These are the growing pains, but it is already evident that there is no way to stop Bitcoin. It is not a tangible thing to be blocked by building a dam or shooting it. The entire system is based on an idea, and that box was opened in 2009. There's no going back now.

Here's a hypothetical situation: assume I'm a high-net-worth individual. I want to get my assets out of my country, but there are limits in place for how much I can transfer without them being held for a lengthy period of time or even seized. One solution could be to buy a bunch of traveler's checks and try to make it across a border. Another could be to carry a big brick of gold. Those options are extremely dangerous, as I'd have to declare them and even if I'm legally compliant, confiscation remains a danger. If I have a third party help to facilitate a large transaction, I'd better trust that party an awful lot (or them, if enlisting several).

Rather than risking all that, I could simply make a domestic purchase of whatever size I wanted for whatever amount of Bitcoins I can acquire. Then, I can cross any border without any physical forms of wealth or even any record of ownership. I don't even need to backup my wallet file that holds the keys to my assets if I use a system like Electrum. On the other side, I can easily and safely recover my wealth.

You might be surprised at how many high-net-worth individuals are just starting to worry about their wealth and are looking for an exit. Are they criminals for being worried that their wealth might be stolen?

LOL. The US dollar is in such demand that we actually make money lending it out.

The question is: why are fiat currencies in demand? To protect wealth, or to scramble so the amount of fiat obtained will keep up with the amount needed to stay solvent? Fiat paper cannot be eaten anymore than gold can.

The run on the dollar is to protect wealth. While you are losing money with this investment you are insured that you will receive that check when the t note matures. All other investments at the moment are such high risk people are willing to park and lose a small amount of money than invest it anywhere else.

Liquidity has little to do with medium or long term intrest rates.

Quote:

If the price of grain falls to a level where $1,000 can purchase all the world's production for one year, that doesn't change the fact that people still need to eat. In the opposite direction, if an organization accrues enough currency to buy all of the world's grain, how will the rest of the world pay for it in an environment of reduced liquidity? What happens to that fiat if the monetary base is expanded to allow people to buy food and eat?

Huh? What does this have to do with anything we are talking about? If their was sound money the same thing happens so what is your point? I am at a loss of what you point is here.

Quote:

Real assets store wealth for long periods of time. Currencies do so over much shorter periods of time, enough to facilitate trade. Central authority can arbitrarily destroy the stability of a currency's value. In order to the same in a Bitcoin system, a government would effectively have to convince more than half of the entire country to accept a 10% drop in the value of the money they hold.

Again not sure what you point is here. Sure you can put incompetant people in charge of the central bank see Greenspan or the current ECB but it takes a lot of work to destroy a currency and its almost impossible to destory a currency that you print and write debt in. Even the worst down times have not caused long term damage to the Pound or Dollar. There is always the risk of inflation (not hyper inflation as that is all but impossible when you owe debt in your own currency) or deflation but with a fiat currency there are mechinisms in place to correct such things as long as their is the political will.

Bitcoin has already shown to be inhertantly unstable. The defenders just keep shouting as it gets larger it will work it self out but as other have already said the sound money is unstable and has been though out history and there is no tools in the toolbox to make the fixes needed.

Quote:

jimisawesome wrote:

LOL. Lets forgot for a moment that except for some libertain gold bug camps in the mountains of Montana or in Upstate Michigan no one that is not a fringe nut is ever going to accept bitcoins. The government is still going to demand its taxes and its not hard to find tax cheats.

And protection for bit coins and keeping anonmous lol. Good luck with that. Lets see I have a choice to keep my money in a bank where its FDIC insured or protected by some internet libertarian? Hard choice there.

Electronic transactions made over existing credit and processing systems are traceable via central control and authority. Each transaction has identifying data sent with it. Bitcoin transactions are cryptographic keys without any associated identifying information. There is no way to determine whether you're logging into your email over SSL or are engaging in a Bitcoin transaction.

Is a government going to watch each and every citizen 24/7/365 to track transactions that aren't made through the 'approved' system? Police would be grabbing mobile phones left and right. It would be cost-prohibitive and Orwellian; not that it won't be attempted.

The IRS uses method to track down tax cheats like lifestyle matching that bitcoins are not going to hide. You still are going to have W2s.

Quote:

If you understand inflation, you realize that the money you have on deposit at a financial institution, protected by FDIC 'insurance' can be diluted to worthlessness even though it is 'protected'. Bitcoins cannot be inflated away any more than gold can be.

Yeah, I am so worried about losing the 3 percent a year. If that is the price to pay to know my money is 100 percent back that is a very small price to pay.

Quote:

jimisawesome wrote:

This worked out smashingly in the past. Direct democracy is a joke when trying to make techinical decisions.

The consensus is not achieved by human decisions. Each node must communicate in a method that is accepted by the majority of the network. This is like an English speaking person going to China - he must speak Chinese to function there. In order to change that, you'd have to convince the majority of Chinese to speak English. It's more complex than that, but the general concept is valid.

Jim, you are not very awesome right now. You are making a typical MMT mistake of missing the connection between the abstract monetary realm and physical reality. Numbers can be fiddled with to the end of eternity, but that won't plant crops or build houses. Money provides a way to make the crops easier to plant - it does not dictate reality, rather it offers a simpler means of interaction.

MMT mistake? MMT is right because its not even a model its actual accounting. Gold does not plant crops or build houses either. Soundness is an extra unneccsary step that gets in the way and has been shown over and over and over and over and over again to be a very bad idea. Gold is no less an abstraction as fiat money is. It still requires trust in something that gold is going to be rare and have people value it in the future. Sound money ignores reality that the economy grows and an artifical barrier is just crazy. It puts a cap on what the economy can do.